Are Bank Loan Ratings Relevant?
45 Pages Posted: 15 Jan 2004
Date Written: December 11, 2003
We analyze the relatively new phenomenon of ratings on syndicated loans. We examine whether credit ratings on these loans convey information to the capital markets. Our event study results show that while initial ratings and upgrades do not inform the market, downgrades do. The market anticipates loan downgrades to some extent, however. We also examine whether a set of observable variables reflecting the default characteristics of the borrower can explain the cross-sectional variation in syndicated loan ratings and find that ratings are only partially predictable. Our evidence also suggests that the loan and bond rating processes differ. Finally, we estimate a credit spread model incorporating bank loan ratings and other factors reflecting default risk, information asymmetry, and agency problems. We find that ratings are related to loan rates, given the impact of other influences on yields, suggesting that the rating agencies provide information not reflected in financial information. In particular, ratings may capture information about recovery rates in default. Our results also reveal that the borrower's equity volatility affects loan ratings and the credit spread, the latter result confirming the findings of Campbell and Taksler (2003) for the bond market.
Keywords: Credit Risk, Credit Rating, Bank Loans
JEL Classification: G12, G14, G32, H25
Suggested Citation: Suggested Citation